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Health Maintenance Organizations Fail to Maintain Health Benefits
Subject Price and Cross-Price Elasticity of Demand
Topic Elasticity
Key Words Managed care, cost, price, co-payments, inflation, real value
News Story

Managed care companies are promoting their Medicare Health Maintenance Organization (HMO) plans for 2002. Seniors are shocked by their cost and restrictions on enrollment.

It is very different from the late 1980s when HMOs competed for business, for example by offering free eyeglasses, transportation to health care facilities, and health club memberships. Later, the HMOs competed on the number and types of doctors they provided. Now, they compete on price, trying to pass costs along to enrollees.

Some HMOs will not pay for brand-name drugs, even insulin. In some areas, this policy has not affected membership. In contrast, certain other plans are increasing drug coverage to reduce the use of hospital services. Some plans are increasing co-payments for outpatient surgery, while others are charging for ambulance rides.

HMOs have been prompted to do this because Medicare only pays what it reckons it would have cost to take care of an average patient three years before. The exclusion of recent medical inflation has a substantial effect on the real value of Medicare's contribution.

(Updated November 1, 2001)

Questions
1. Suppose that a diabetic has to pay a much higher price for insulin, which is necessary to control diabetes.
a) Draw the diabetic's demand curve for insulin. Why does it have the slope you have drawn?
b) In what range is the elasticity (or inelasticity) of demand? Why?
2. In the areas where HMOs have not paid for brand-name drugs and membership has not been affected,
a) In what range is the cross-price elasticity of demand for brand-name drugs and HMO membership?
b) What type of goods are brand-name drugs and HMO memberships?
3. In the late 1980s, some HMOs reduced the price of certain goods and services, such as eyeglasses and health clubs, to zero, and attracted more members.
a) In what range was the cross-price elasticity of demand for eyeglasses and HMO membership?
b) What type of goods are eyeglasses and HMO memberships?
Source Jodie Snyder, "HMO seniors feel pinch," The Arizona Republic, October 18, 2001.

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